While Standard & Poor’s currently has more than 400
license agreements covering clearly specified uses of
S&P indices and marks, including agreements related to
exchange-traded funds (ETFs), the complaint seeks to
prevent Vanguard from using the trademarks in conjunction
with Vipers or any other exchange-traded security.

It also seeks an order declaring Vanguard in material
breach of their 1988 license agreement, as well as holding
them liable for unspecified damages and attorneys’
fees.

“Cheap” Shot?

The complaint contends that Vanguard tried to
“shoehorn” its usage of S&P indices and trademarks
within the scope of a 1988 agreement between the two firms,
rather than expanding that license – and the fees it pays
for such license – to include the new offerings. In a press
release S&P says that while the new exchange-traded
funds have been positioned as shares of existing open-end
mutual funds (and covered by the prior agreement), they are
different. They “exhibit all of the characteristics of
shares of an ETF, which differ significantly in a number of
ways from shares of the open-end mutual funds that Vanguard
has offered under the 1988 agreement”.

“Standard & Poor’s indices are among the most
recognized and respected investment benchmarks in the world
and have grown in popularity thanks to the innovative work
and creativity of our staff,” said Leo C. O?Neill,
president of Standard & Poor’s. “This lawsuit seeks to
protect the invaluable intellectual property and work
product that we have spent decades creating.”

A Surprising Tactic

In a statement, Vanguard characterized the complaint as
“baseless and without merit, and a surprising tactic.” Greg
Barton, Managing Director and General Counsel of The
Vanguard Group distinguished the proposed Vanguard
offerings from other exchange-traded shares. ” There has
been no change in the management of the Vanguard index
funds or Vanguard’s use of S&P’s intellectual property.
Rather, the exchange-traded shares represent merely a
different form of distributing shares of our existing
funds.”

Vanguard maintains that the VIPERs represent interests
in the same funds already covered by S&P licenses – and
intends to contest McGraw-Hill’s charges. If approved, the
Vanguard Group ‘s recent filing for five exchange-traded
versions of its stock index funds would be the first time a
traditional fund had an exchange-traded class of
shares.